What is gratuity and how it is calculated?

What is gratuity and how it is calculatedWhat is gratuity and how it is calculated?

Gratuity is the form of gratitude provided to employees in monetary terms for services rendered to the company. It is the important form of social security benefit provided as per Gratuity Act. Employees would get benefitted through Gratuity when they stay longer period in a company. In this article I would detail about what is gratuity, who is eligble for gratuity payment, how it is computed and how gratuity is taxed.

Who is eligible for gratuity payment?

An employee is eligible for gratuity, if he/she has completed 5 years of complete service with the company. However in case an employee expires, this 5 years is relaxed and he would be paid for every 1 year completed service. Please note that company need to have at least 10 employees so that they can pay gratuity to eligible employees.

Also read: 10 Ways to double your money

When is gratuity payable or paid?

Eligible employees would be paid gratuity in case of resignation, retirement or superannuation or death.

How Gratuity is computed?

Gratuity is paid for 15 days of every completed year of employment after 5 years of service. If you have worked for more than 6 months in a year, it would be treated as 1 completed year. Means if you worked for 5 years 6 months, you are eligible for 6 years gratuity. However if you worked for 5 years 5 months, you are eligible only for 5 years gratuity. Below is the method of computation

  • Gratuity paid for 15 days for every completed year of service
  • Your last drawn basic salary + DA will only be considered for computation
  • Number of working days would be considered as 26.

                                    15 days x no. of years completed

Gratuity payable =      ——————————————-

                                                26 (working days)

e.g. if you have basic salary + DA as ₹ 40,000 per month and you worked for 5 years 6 months which is equivalent to 6 years. Below is the computation of gratuity.

                   15 x ₹ 40,000 x 6 (years)

Gratuity =    ——————————– = ₹ 138,641

                                26

Tax treatment for gratuity income

For the purpose of gratuity taxation, employees are divided into 3 categories. Govt employees, other employees who are covered under payment of gratuity act and other employees who are not covered under payment of gratuity act.

a) Govt employees: Gratuity is fully exempted from tax for all Government employees.

b) Other employees who are covered under payment of gratuity act: Least of the following is exempted from income tax

  • 15 days of salary for every completed year of service (Including part there-of)
  • ₹ 10 Lakhs
  • Actual gratuity received

Illustration: An individual who has ₹ 40,000 as basic + DA per month and who has finished 5 years and 6 months would get gratuity ₹ 40,000 x 6 x 15/26 = ₹ 138,641

c) Other employees who are NOT covered under payment of gratuity act: Least of the following is exempted from income tax

  • Half month average salary for every completed year of service (average salary is arrived for the basic salary+ DA received in the last 10 months). Part of the year would be ignored
  • ₹ 10 Lakhs
  • Actual gratuity received

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Illustration: An individual who has ₹ 40,000 as basic + DA per month in the last 10 months and who has finished 5 years and 6 months would get gratuity ₹ 40,000 x 5 x 15/26 = ₹ 115,384

In case an employee has claimed gratuity exemption earlier, the amount would be reduced from current amount and maximum eligible exemption would be ₹ 10 Lakhs only.

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Suresh
What is gratuity and how it is calculated

Suresh KP

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103 comments

  1. Hi Ravi, Please confirm if basic salary is calculated for montly/Annual basis?

    for example if a monthly basic salary of an assoicate is 7000, Should we consider 84000 while calculating? 

  2. Dear Sir,

    My salary is 65,000/- in addition further Rs. 5,000/- also paid monthly as a special allowance. Kindly let me know when computing service gratuity which amount can be taken as my monthly earnings. Is it Rs. 65,000/- OR Rs. 70,000/-

    Thanking you

     

    1. Hi Ravi, Gratuity is computed based basic salary + DA. Is your 65K is only basic + DA. If yes, it would be on Rs 65K. If your salary of 65K includes all other allowances too like HRA, Medical etc., you need to exclude them too

  3. Hello,

    As you said its a gratitude towards employee, is it fine to put gratuity component in salary breakup and deducting gratuity amount everymonth, and when any employee will complete 5 years then only he will be entitled to get his own (total gratuity amount which got deducted) money, or the employee who has not completed 5years has to leave his gratuity amount which got deducted evey month from his salary, please explain. how come it can consider as gratitude.

  4. I joined 22nd nov.2011& resign 21 april2017 leave company 21sunday may 2017 clearance no dues on 22 may 2017 i eligible.for five year or 6 year gratuaty.

  5. My wife worked as a primary school teacher fro 1st June 2011 to 30th April 2017 at a reputed school in Pune. The contract was renewed every year. However, there was no break in service, and she recd continuous salary for all the months she worked in the school.
    When she went to collect her dues, she was denied the gratuity stating the first 2 years she worked voluntarily, and is hence not eligible to receive Gratyity.
    This is pure injustice, and against the Gratuity Act, which clearly states that each employee is eligible to get Gratuity after 5 years of continuous service.
    Since she has put in 5 years 11 months of service, she MUST receive Gratuity as per ACT. Please let me know if I am right!

  6. Please clarify. I worked for company for 7 years 3 months. My basic is Rs.36500. I served for 20 days in my last month of job for which they paid basic of 23548 in my last month. Now does the Gratuity computed on the Rs 36500 or on 23548.

  7. Sir, 

    I pay my employee a lump sum of Rs.35,000/- as take home salary.He is in service for 27yrs.How do I calculate gratuity payable.

    Kindly suggest.

    Regards

  8. hello,

    My employer has a different structure to calculate the gratuity. As per normal norms of a mandatory 5years completion, my employer considers gratuity from 3rd year onwards. It says "After 3rd year @15days for 3rd year, @22 days for 4th year , @30 days for =or>5years" in my CTC structure to calculate the gratuity. Here are my questions:

    1. Say, i leave my job in 4th year (4 years 1 month) how will the "15/26 " component in gratuity calculation restructure itself?

    2. as i understand, 15 is the number of days of last BASIC+DA and 26 is the number of days in a month (30 -4 paid working days), is this structure same for all the employees? What if i have a 5 day a week structure i.e saturdays and sundays off, will the 26 evaluate to 22 (30 – 8 paid days)?

    3. I dont have a DA component, what should i add to my basic? Is it the Basic+HRA+special_allowance ? or just the Basic ?

    Regards,

    Shubham

     

     

  9. hello sir my gross sallery is 25600/- & my joining date 01/06/2010 to till date. so my gratuity how many amount & plz tell confirm method

    1. For calculation of gratuity, you should to know your Basic+DA, because of, absense of it you can't able to calculate your Gratuity amount. Gratuity is applicable on BASIC+DA.

       

  10. You have completed 21 years of service. Gratuity will be Rs. 2,30,192/-.
    Calc : Rs. 19000 Basic x 15 Days x 21 Years / 26 Days ).

    I hope it will be helpful.

  11. Dear sir my joining date is 08/03/1996 and my last working day was 10/01/2017 last basic salary given by 19000/ sir pls. tell me how much gratuity amount

  12. Dear Sir,

    My joining date is 01/08/2011 & Leaving date is 06/09/2016.
    I joined as a Trainee Engineer for a period of one year & their after confirm as Engineer.
    I want to know that may i eligible for gratuity claim or not.

  13. Dear sir my date of joing is 01-04-2011 and my last working day was 14-10-2015. I am eligible or not for gratuity.

  14. I AM WORKING IN CO-OP BANK. I HAVE HEARD THAT GRATUITY AMOUNT IS INCRESED FOR EMPLOYEES COVERED UNDER 7TH PAY COMMISSION, WHICH IS NOT APPLICABLE TO ME. OUR INSTITUTION

    IS PAYING 10 LACKS TO EVERY EMPLOYEE, CAN THIS BE APPLICABLE TO US?

  15. Dear sir my joining date is 5/08/2010 and my last working day was 18 /08/2016 ,last basic salary given by the employer is 2200 + hra 2200 they offer me gratuity promice 57692 is it correct promice if not please tell me the correct amount & how we calculate the year promice service

  16. Dear sir
    In case of gratuity forfeited
    If employees makes loss in co. More than the gratuity amount then what we do

  17. D/s

    with reference this letter I have been complieted One Co. 5 years in that regard i taken leave for 2 months due to medical Purpose in case i regin this co shell getting Gratuity or not 

  18. D/s

     

    I am working  one co for  4years 11 months, 12 month running in that regtards i taken 2 months leave due to Medical Purpose , in case Co. I resign shall i getting Gratuity or not 

  19. i am working in software firm from 11-08-2011 to till date i need to quit this job, i am planning to drop paper on 30/08/2016 so that i need to serve notice period for another two months,Including my notice period i completed 5 years of service,can i eligible for Gratuity including my notice period.(on 11-08-2016 i am completing 5 years of service)can anyone can help me out.

  20. I have worked for 17 years and at the time of leaving the orgianisation the total strength of the staff is 10. Am I eligible for gratuity? I have reached 58 years some 6 years before. Can I get gratuity?

  21. i completed 58 years in october 2014 and worked for two more months on full salary and was retired on 31 december after two months superannuation. how will my gratuity be calculated . according to my salary in oct. or dec

  22. Awesome….just loved the article. While reading this article you can just clear all your doubts. Thank you so much!

  23. Hi Sir,

    Could you help me in calculating How much gratuity I will receive in fact I m an Pvt employee in Public Limited Company completed 5yrs 2 months of service planning to Quit the profession.
    Herewith I will enclose my salary details :

    Basic Salary : 16750/-
    HRA. : 2000/-
    Other Allowance : 19734/-
    Education Allowance : 200/-

    Total Gross Salary per month : 38684/-

    Pls help me in this Regard.

  24. Hi,

    I had worked in a single organization for 8 Years and 10 months. Out of which, 4 Years I was out of indian payroll as i have travelled out of country . On my Full & final settlement i have been paid only for 5 years Gratuity. Is tat 4 years has been reduced since i was not under indian payroll act ? can somebody please clarify why only for 5 years amount has been paid off?

  25. Suppose i’m working any company 6 yrs 6 moths completed & my last salary basic 7600 so i am applicable how much year..please calculate & revert..

  26. I have a doubt, my staff is been working in our retail shop since my father days, approx 50 years. and now since he is quitting we willing to give a gratuity of half month salary * number of years. i e 15000*15/26*50year = 432690. But even then he is demanding more and not willing to quit job and reporting to duty but not giving 100% dedication to work .

    whats the procedure to deal with such workers. Please help!!!!

  27. from State Planning Board, Govt. of West Bengal for 2yrs and 7.5 months i’ve joined UCO BANK through proper channel as advised by the Officials as i will got benefit after my retirement on the payment of Gratuity. at present I am in 37 yrs in UCO BANK RETIRING ON 31.12.2015. AS SUCH MY GRATUITY will be 37+2yrs – 7.5 months.
    please confirm with evidence i.e. rules on this particular area.

  28. i fnd d ans z wrng… like 40000*15*6/26 = 138,461 itz d rgt ans ur ans138,641 z wrng…
    nywz thanks fr dis article

  29. Hello Sir,

    I was working in a software company from 26th july 2010 and on this 26 july 2015 I will be completed my 5 years. As on the completion I will be eligible for graduatity amount but suddenly on 9th july 2015 my MD told me that there is company crisis and terminated my services without giving any reason, just told that company is fighting with the financial crisis so they have to reduce the staff.

    Now I want to know the process of graduatity, Is there any possibility so that I can receive my gratuaty amount from the company. I have no idea about it. I read on some of the blogs about it but could not get any clear idea about that. Can you please help?

    Many thanks to you in advance.

  30. Thanks for such a nice article. In some other article, it is written –

    “If the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.”

    In this article, more than 6 months is considered as 1 completed year. Which one is correct? Will the employee eligible for 20 years or 21 years?

  31. Hello Sir,

    I work in a Private IT company. In our Earnings statement there is no such component as DA. There is Basic,HRA, Conveyance allowance and special allowance. So in my case, only the Basic will be taken into consideration?

  32. I joined organization on 16the march 1999 and resigned on 11th march 2015
    Kindly let me know how much gratuity I will be greeting?

  33. Hi,

    I joined my previous organization on 16-06-2008 and resigned on 11th November 2015. This turns out to be period of 6 years and 4 months. I have served additional 90 days (3 months) of notice period from the date of resignation. I was relieved on 6th February 2015 from the company. Total period including 3 months of notice period sums up to 6 years 7 months and 23 days.
    My question is which period will be considered for gratuity calculation
    1. 6 years 4 months (without notice period) which will be rounded off to 6 years
    OR
    2. 6 years 7 months and 21 days ( which includes notice period of 3 months) which will round up to 7 years.

    Also my last drawn basic was Rs.44344.00 which was revised during my notice period. Prior to revision it was Rs. 40683.00. What will be my gratuity amount ?

    Thanks in advance.

  34. I have worked for 42 years in semi government organisation. Last salary ( Basic + DA) + Rs. 39000.00 per month.. Am I eligible the amount 39000/26X15X42=945000 or it is limited to 33 years services ( i.e. 16.5 months).
    kindly let me know 9828121564 rs******@ho*****.com

  35. Hi. Nice article. Could you please clarify:

    1. Is gratuity paid after 5 years or only when you leave the company ?

    2. I have a gratuity amount clearly mentioned in my ctc for the last few years. Does completion of 5 years mean the payout will be the sum total of this amount that’s mentioned. Eg. 1 lac *5 years . Is this correct or is it some other calculation.

  36. Hi Suresh,

    Thanks for the insight you are giving to us.

    I have one question. If I complete 5 years 6 months 1 day in the company, Will it be treated as 6 years or 5 years?

    Thanks in advance

  37. Hi,

    I worked 5years & 3months in the last organization.

    I have got first one year salary in cash and after a year, I got PF benefit.
    so I want to know I am able to apply for gratuity or not ?
    but I have appointment letter & experience letter for 5years & 3months duration.

    In some organization, they provide the salary in cash in India but it is not our fault.
    I am worry they may be regret to my gratuity.

    please help me out for the same.
    how will I receive my gratuity ?

    Thanks ……………….

  38. My Question about Gratuity is :
    1.It is a part of CTC .
    2.Why we need to complete 5 yrs .
    3.Why cant it be transfered / Portability.

    1. Satish, All companies have made this as part of CTC itself. Gratuity is paid by companies for employees who are sticking to organisation for long term and it is like a reward. 

  39. i have completed 7YEARS of service in my company and i asked for the gratuity ,but my HR refused to pay ,how can i claim the amount

  40. Hi ,

    I worked in a top Indian IT company for 6 years and quit last month.

    My total gratuity amount is Rs 51508. Howvere I received only Rs 35592.

    Rs 15000 has been deducted as tax. 

    Why is such a huge amount deducted as tax ? its nearly 31% ?

    Should I not be exempted from tax for being with the company for 6 continous years ?

    Is there any way I can claim this money?

    Please help me.

    My provident fund is also yet to be settled.

    Can you please let me know how much tax will be deducted from it ? and if there is any way to avoid that.

     

    Thanks.

     

     

     

     

     

     

    1. Hi Latha, Generally companies would deduct income tax based on your income tax slab. If you are falling in 30% tax bracket, they would have deducted this. You can claim this money thru ITR and get the refund. In case you are not falling in 30% tax bracket, you should immly approach your previous company for clarification.

  41. Dear,

     

    Thanks for hte above KT, a small querry from my side, i am serivng notice period which is going to be completed in 30 days and in between the notice period i will be completeing 5 yrs , so company will give me gratuity or not?

    thanks in advance

    1. Gaurav, if you complete 5 years in the company on your last day, you would get Gratuity. If is immaterial whether you are serving notice period.

  42. Hi sir good day,

    Thank you very much for giving knowledge on claiming gratuity pay. I am a sales supervisor for 6 years and 6months. I am now currently working. My wife wants me to resign due to some personal matters. I ask our HR DEPT. how much will i get? They told me that i cannot get any gratuity pay because i am working in sales. Please help me sir. I'd been working in my company with all the good performance 

    1. Hi Elpedio, If you are working in India, you are eligible for gratuity after 5 years of completion of service. There is no differentiation whether one is working in sales or non sales division. You may contact HR head to get more clarity on this.

  43. Dear Sir

    Kindly clarify the followings please.

    The amount was limit to Rs. 1.00 lakh raised to Rs. 3.50 lakhs and now to Rs. 10.0 lakhs. Previously there was a rider in the gratuity subject 16.5 times of emoluments or limit to the slab whichever is less. Kindly confirm whether the rider of 16.5 times of emoluments is stands or withdrawn. regards.

  44. Hi, I left my previous organisation after working there for 4 years and 8 month and as per company policy I received received my gratuity as a part of F&F settlement. I would like to know if my gratuity comes under taxable income just because I did not complete 5 years of service?

    1. Deepesh, As per my knowlege gratuity is paid after 5 years of completed service. Taxability is given in the article. I am not sure how you got gratuity when you worked for less than 5 years. Can you pls recheck.

  45. Hi, I have worked in a private organisation for 5 years and 2 months. Is there any way that the Company can deny paying me gratuity? Please also let me know that in case I resign after completion of 5 years and 2 months, and have notice period of 3 months, what is the time period for which gratuity will be calculated?

    1. Mukta, If you worked for more more than 5 years, company has to pay gratuity. If they refuse, you can proceed legally. Since you would work for 5 years 5 months if we round off it would be 5 years only. You should get 5 years (15 days per year of basic salary) gratuity.

      1. i am working in software firm from 11-08-2011 to till date i need to quit this job, i am planning to drop paper on 30/08/2016 so that i need to serve notice period for another two months,Including my notice period i completed 5 years of service,can i eligible for Gratuity including my notice period.(on 11-08-2016 i am completing 5 years of service)can anyone can help me out.

  46. Is gratuity calculated on current basic salary and DA or is it calculated on yearly basis??? Please clarify on this doubt!! Thank you……….

  47. Hi Suresh,

    This article was interesting and very useful.

    I have the below query related to taxation of superannuation amount, could you advise on the same. ( May be an article on SuperAnnuation could be useful to many)

    I commutted 1/3 of my superannuation amount which was Rs63,990.00, my previous company have deducted 30%+3%cess as tax on this and have issued a form16 to this effect, could you please advise if superannuation amount can be considered part of standard deductions amount of Rs 2,00,000 (I'm and NRI and I don't have any other salary income in India) ? If so, could I file my IT returns to claim refund ?

     

    Thanks,

    Kiran

     

     

     

    1. Kiran, this is part of salary component, hence it is treated as regular income. This can be shown as standard deduction of RS 2L and you can claim for refund.

  48. Hi suresh,Good article on gratituity .Thanks for giving me the scope for clarifying my doubt on it.

    I am working in a private organisation for past 5 years 1 month.

    While joining in this company,I was given post of GRADUATE ENGINEER TRAINEE ,after 1 year i have got conformed and was given post of ENGINEER.So,my total experience comes in this way :

    GRADUATE ENGINEER TRAINEE — 1 year

    ENGINEER                                     — 4 year 1 month

    Please tell me when am i elligible for gratuity?

     

     

    1. Abhi, Some of the companies consider trainees as seperate employees from that of permanent and all benefits are not counted. They could count only after they confirm. Please check with your HR or payroll section and they should be able to clarify. 

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